The Treasury Secretary said that sanctions have undermined the dollar
US Secretary of Treasury Janet Yellen this week warned that there would be “slow decline” in the US dollar as the global reserve currency. Asked if the US should be concerned about “slapping sanctions around the world”, Yellen told US lawmakers that countries fearful of sanctions were “motivated” to look for dollar alternatives. “It’s something we have to accept,” the Treasury Secretary noted.
Despite her gloomy prediction, Yellen remained bullish about the dollar. Giving her annual testimony on the state of the international financial system to the House Financial Services Committee, the former chair of the Federal Reserve said that no alternatives could fully replace the US currency due to unique strengths like deep financial markets, the absence of capital controls and strong rule of law.
Yellen went further by noting that while the dollar’s status as a reserve currency had eroded over the past 20 years, it remained the most popular. “We should expect over time a gradually increased share of other assets in reserve holdings of countries,” the Treasury Secretary stated. “It’s a natural desire to diversify, but the dollar is by far and away the dominant reserve asset”.
This year, Yellen has become increasingly vocal about threats to the dollar. During debt-ceiling negotiations last month, the Treasury Secretary warned that a failure to reach a deal would have an “adverse impact” on the dollar’s status. And in April, she announced that there was a “risk” associated with sanctions that could “undermine the hegemony of the dollar.”
The Treasury Secretary joins a long list of leading figures in the Western world who have expressed concerns about the dollar’s eroding status. Back in April, ECB President Christine Lagarde announced that global competitors were seeking “alternatives to major traditional currencies for international trade”, while former Treasury Secretary Larry Summers told Bloomberg that the US was “getting lonely” on the world stage. “There’s a growing acceptance of fragmentation, and — maybe even more troubling — I think there’s a growing sense that ours may not be the best fragment to be associated with,” he said.
During the hearing, the threat posed by China was raised several times. Yellen was asked how the Treasury would respond if China — the second largest creditor of US treasuries — “dumped” $859 in treasury securities “overnight” following an invasion of Taiwan. Yellen responded that she was “certainly concerned” about the possibility, but had not considered the scenario in detail. In response, lawmakers instructed that the Treasury and Federal Reserve “make preparations” and “be on the ready” for such an event.